Proper planning and resource dedication allow you to address post-acquisition audit expectations in an efficient and cost-effective manner.
Key insights
- Your first audit following an acquisition brings additional complexities, so be prepared.
- Common pitfalls include an organization’s lack of urgency, communication, and understanding.
- Consider the following recommendations to avoid these pitfalls.
- CLA’s experienced team can help you prepare for your initial audit.
Need help with your first year audit?
When you sign a purchase agreement after an exhaustive buy-side due diligence process, a financial statement audit may be the last thing on your mind. While strategic and operational initiatives are top priority for private equity owners and their portfolio management teams after an acquisition closes, the clock is ticking toward that inevitable first year audit.
This initial audit brings additional complexities following an acquisition. Use a proactive and strategic approach to help drive an efficient audit process that may reduce cost, support management, and encourage timely reporting to investors and lenders. Watch for the following obstacles when preparing for a first year audit and learn how you can avoid them.
Common first year audit pitfalls
There are a number of pitfalls that impact portfolio companies, private equity owners, and their management teams.
1. Lack of priority and urgency
In this instance, the audit is viewed as a commodity that doesn’t add value. The audit may not be a priority for the strategic decision makers, but it’s required by a third party. If the audit is inevitable, why not make it as efficient and cost-effective as possible?
The right approach can bring value during the audit process by strengthening the internal controls and financial reporting function. Auditors with appropriate industry knowledge can also bring value and perspectives around financial reporting metrics, benchmarking, and other industry-specific recommendations.
2. Lack of communication
Often new owners, portfolio company management, the audit team, the quality of earnings (Q of E) team, and other third-party service providers lack communication throughout the audit process. This is often due to:
- Lack of legacy knowledge transitioned from Q of E team to audit and management team members
- Lack of addressing post-acquisition recommendations provided by the Q of E team
- Lack of a plan and regular contact between all parties
By placing a premium on communication early, your organization can potentially avoid issues when audit time arrives.
3. Lack of understanding of first year audit complexities
Your organization may have been audited pre-acquisition, but the first year after a change in control adds complexities, which include:
- Purchase price accounting
- Transaction costs
- Fair market value of assets
- Complex equity or compensation structures
Even if you’re familiar with the first year auditing process, you must still account for post-acquisition nuances.
Recommendations for an effective post-acquisition audit
Consider taking these steps to prepare for an efficient audit process.
- Identify an audit readiness team — Assign tasks at the beginning of the engagement to hold each party accountable, and assign each audit request or action item to a management team member.
- Address buy-side due diligence findings — Many of these findings may be audit issues, so address them early.
- Develop a plan early — New owners should lay out a timeline for management and the audit team ahead of the engagement. Schedule regular status calls to hold all parties accountable.
- Engage other third parties early — Identify where help is needed. Contact valuation firms and appraisers well in advance.
- Stagger significant audit areas — Complete work throughout the year at a reasonable pace to help reduce the burden on management. Focus on areas such as the opening balance sheet, interim fieldwork, and year-end fieldwork.
How we can help
A financial statement audit may not take priority over strategy and operations — but don’t ignore it. Investors and lenders want a clean opinion and timely audit. Proper planning and resource dedication can help you meet these expectations in an efficient and cost-effective manner. For assistance preparing your first year audit, reach out to your CLA team.